A review into the Research and Development (R&D) Tax Incentive has recommended the federal government focus more on encouraging research or it will impact the program's long-term continuation.

The review was undertaken by Chair of Innovation Australia Bill Ferris, Australia's Chief Scientist Alan Finkel, and Secretary to the Treasury John Fraser, after Prime Minister Malcolm Turnbull tasked the trio with "identifying opportunities to improve the effectiveness and integrity of the R&D Tax Incentive, including by sharpening its focus on encouraging additional R&D spending".

The review into the program that handed out AU$2.95 billion in 2013-14 found that the R&D Tax Incentive falls short of meeting its stated objectives of "additionality and spillovers", and that it could do more to encourage additional research and research spillovers into other sectors.

In compiling the review, Ferris, Finkel, and Fraser made six recommendations they said are aimed at improving the performance of the program and also ensuring it has a long-term implementation.

Three of the recommendations encourage research that would otherwise not take place, known as "additionality", which includes providing extra incentives for businesses to hire PhD graduates and to work closely with Australia's research institutions.

The other three recommendations seek to strengthen the effectiveness of the program, including through reducing compliance costs for companies.

"Although collaboration is not a focus for the program, the panel believes that the modest existing levels of collaboration between industry and research institutions represents a lost opportunity and we recommend providing a higher tax offset to encourage greater levels of collaboration," the review says.

To tackle the lack of "collaboration", the panel recommends the introduction of a 20 percent "collaboration premium" to encourage large companies to work with research institutions or recruit more STEM PhD graduates.

The review also suggests that the government introduces a minimum threshold before companies receive benefits, and increases the maximum annual expenditure that can be claimed against the tax offset from AU$100 million to AU$200 million.

Another recommendation was that the program develop new guidance in "plain English" around what constitutes an eligible activity for R&D expenditure.

Overall, the panel said that the R&D Tax Incentive is, and should remain, an important investment in a prosperous future for Australia. It also wants to see the names of companies accessing the incentive and that the amounts of R&D expenditure claimed should be publicly available on an annual basis.

Alex McCauley, CEO of StartupAUS, said he wanted to see more focus on the "pointy end" of the program, where dollars spent on startups translate directly into jobs produced and additional R&D being conducted.

"StartupAUS has advocated extensively for boosting the R&D Tax Incentive for high-growth early-stage startups. Our view has for some time been that the government should look at boosting the amount allocated to startups under the program, while at the same time paying it quarterly to help young companies overcome cashflow issues," McCauley said.

"We welcome elements of the review. We agree that reducing the administrative burden and providing greater transparency are positive steps."

The R&D Tax Incentive allows companies to claim a tax break for the money they spend on internal R&D, and in February last year, Parliament passed legislation that limits the amount for which companies can claim R&D tax breaks to AU$100 million.

In March last year, the Senate then voted against the Tax & Superannuation Laws (2014 Measures No. 5) Bill 2014, which included a proposal to introduce a 1.5 percent cut to the current R&D tax offset rates of 40 percent and 45 percent from July 1, 2014.

It was pitched by former Prime Minister Tony Abbott as a move that would result in savings of AU$550 million in underlying cash balance terms over the four-year forward estimates.

At the time, both the Labor and Greens parties called the Bill block a win for innovation among local small to medium enterprises. Senator Kim Carr, Shadow Minister for Higher Education, Research, Innovation and Industry, said SMEs would have been "savaged" by the government's proposal, as SMEs make up more than 70 percent of the users in the R&D tax offset scheme.

"What this Bill does is undermine the small and medium-sized enterprises as well, not to mention the universities and all the other supply-chain enterprises that are affected by these proposals," he said previously.

"It is the small and medium-sized enterprises which rely on the existence of a permanent and stable tax incentive in order to invest in R&D. This is critical to their business case as much as it is to the larger firms."

The closing date for submissions on the review is October 28, 2016, with industry and state-based roundtables to follow. After submissions are received, the government will then hold further discussions during November and December and will respond as part of the "second wave" of its National Innovation and Science Agenda, with the intention of finalising their response before the end of March 2017.

Thank You

By registering you become a member of the CBS Interactive family of sites and you have read and agree to the Terms of Use, Privacy Policy and Video Services Policy. You agree to receive updates, alerts and promotions from CBS and that CBS may share information about you with our marketing partners so that they may contact you by email or otherwise about their products or services.
You will also receive a complimentary subscription to the ZDNet's Tech Update Today and ZDNet Announcement newsletters. You may unsubscribe from these newsletters at any time.